Economist Meardon Offers Thoughts on Proposed Mexico Border Tax

Associate Professor of Economics Stephen Meardon, on leave from Bowdoin this academic year, has temporarily assumed the directorship of the Center for the Study of Western Hemispheric Trade at Texas A&M International University in Laredo. Meardon has been examining the issues at play with the proposed 20 percent border tax on Mexican imports and offers the following thoughts.

Stephen Meardon

That the president’s press secretary [Sean Spicer] raised the prospect of “tax[ing] imports from countries that we have a trade deficit from, like Mexico” at this particular moment does suggest that the president is using the prospect of a tax as a gambit to get Mexico to agree to pay for a border wall. It would seem unlikely to work in that way, but it could work in another way, as Spicer went on to describe.

The tax could raise revenue that would pay for the wall, and although part of the economic incidence of the tax would fall on US citizens, part of it would fall also on Mexicans, and to that extent Mexico would “pay for the wall.”

That said, Spicer raised the prospect in the context of the Republican plan for comprehensive tax reform: the Paul Ryan/Kevin Brady blueprint, “A Better Way,” of last June. The blueprint does call for a 20 percent border adjustment tax. But it is not directed at “countries that we have a trade deficit from, like Mexico,” as Spicer said. The aim of the border adjustment tax is to compensate for the different tax treatment of US exports versus foreign exports to the US under the fundamentally different tax systems of the US and its trade partners.

In the US system, where revenue is garnered mainly by income taxation, the production of goods for export bears the burden of income taxation just like other goods. In countries with a value added tax (VAT), which aims to tax domestic consumption, taxes are refunded when a good is exported. The border adjustment tax aims to correct the discrepancy. Thus it aims to stop rather than induce discrimination between imports and domestic production; and in principle it does not discriminate between imports from different partners, including those with which we have a trade deficit. (Whether the border adjustment tax as proposed, in light of the other proposed changes in the blueprint, would be deemed consistent with WTO rules is another question.)

US-Mexico border. File photo

President Trump does have considerable executive authority to renegotiate trade agreements and to increase duties on imports from particular partners. The Trade Act of 1974 and the NAFTA itself allow him to withdraw from the NAFTA with six months’ notice; and the 1974 Act gives him the further authority, after withdrawing from a trade deal, to proclaim still higher duties.

It is notable that the president’s press secretary does not invoke that authority. Why not? My guess is that the president is walking a fine line between, on one hand, keeping his campaign promises to renegotiate NAFTA and to build a border wall and get Mexico to pay for it; and, on the other, maintaining the goodwill and allegiance of legislators of his own party, who want to have a say in such momentous policy changes and who do not wholly go along with his protectionist impulses. When the president invokes the House Republicans’ own tax reform plan as a strategy of simultaneously making Mexico pay for the wall and giving him more leverage in NAFTA renegotiations, he probably sees himself as hewing exactly to that line.

Maybe the most interesting aspect of the strategy, though, is that it works insofar as the invocation of the border adjustment tax actually does give the president more leverage. Which is to say, it works insofar as people believe that the border adjustment tax is exactly what its Republican authors intend it not to be: an instrument of discriminatory trade policy. The hyperbolic press accounts of the president’s call for a 20 percent tax—usually without reference to the nature and original intention of the tax, and aided by the press secretary’s creative elision—are helpful to that end.

 

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